Focused Lansdowne tapping the potential of the Celtic Sea

You wonder whether Chancellor George Osborne hammered the final nail in the coffin of the North Sea with his windfall tax.

For if it was aimed at profiteering big oil it missed spectacularly.

It hits disproportionately the small and mid-cap explorers on the UK continental shelf.

It has also prompted some of the larger operators to rethink their capital expenditure plans, not least Statoil, which has put its UK North Sea investment on hold.

One of the other unintended consequences of Chancellor Obsorne’s raid was to highlight the attractions of Ireland, where taxes on oil and gas are far lower.

The majors’ obsession with the North Sea in the 1970s and 80s means some promising early exploration work there was shelved and areas such as the Celtic Sea remain under-explored

This of course is a boon for the latest generation of Irish explorers. 

Providence Resources (LON:PVR) is blazing a trail with an ambitious US$500 million programme underway.
But there are others such as San Leon Energy (LON:SLE) and Lansdowne Oil & Gas (LON:LOGP) that have thus far flown below the radar.

Lansdowne is interesting in that its fortunes are linked in part to those of Providence as the pair between them own 70 per cent of the Barryroe field in the Celtic Sea.

Providence is the operator with 50 per cent and is set to begin drilling later this year. However before that the partners are garnering 3D seismic data on the prospect.

Those familiar with Barryroe will remember Exxon has already drilled two holes there with a third being sunk by Marathon.

All flowed at 1,400 to 1,600 barrels of oil a day, so this isn’t a wildcat exploration target.

And importantly, the last well drilled was tested using only a half-inch choke and without modern-day innovations such as high angle/horizontal well drilling and pumps that could be used to enhance flow rates.

For Providence it is part of a much more ambitious project that will see it circumnavigate Ireland sinking 10 wells in two years.

Lansdowne is taking a far more focused and it should be said cautious and technical approach to the exploration and development of its licences.

As well as Barryroe it owns the Amergin, Rosscarbery and Middleton licence areas and is targeting 118 million barrels of oil equivalent of prospective resources from the three areas.

Amergin is an oil target, while Rosscarbery is thought to have potential for both crude and gas.

Middleton, meanwhile, is a “direct analogue” to Ballycotton, a 60 billion cubic feet field, according to Emmet Brown, Lansdowne’s corporate development director, and a Celtic Sea veteran.

He refers to the single well Ballycotton as “little cash machine”, and in doing so hints at the potential significance of Middleton if it lives up to its billing.

Lansdowne owns Amergin, Rosscarbery and Middleton outright, but will farm down once it has acquired 3D seismic data on each field.

The 3D will come from the Polarcus vessel  that has been commissioned to work on Barryroe. And after raising £5 million at 25 pence a share last month, Lansdowne has the funds to carry out this work.

Like Providence, Lansdowne’s efforts have been greatly aided by a massive improvement in the technology.

“The sea bottom is covered by chalk and that has been a technical challenge for the industry,” Brown says.

“The hard sea-bed causes problems for the seismic and much of the data from the 1970s, 80s and 90s seismic was poor quality. Therefore your understanding and definition was poor.

“What’s happened has been a major improvement in the quality (of the data) both from better acquisition and improved data processing – things have moved on enormously. Lansdowne acquired new 2D seismic data in 2008 that was a step-change improvement in data quality and we anticipate 3D seismic will result in a further uplift.”

While the 3D will enhance the company’s understanding of Amergin, Rosscarbery and Middleton, the Barryroe drill results, due later this year, should be an early catalyst for Lansdowne’s stock.

Expect some real excitement if the well flows at a rate significantly in excess of those earlier holes – which with today’s technology isn’t a stretch.

A flow rate above 1,800 barrels a day makes Barryroe economic, according to an independent report compiled by RPS, which also estimates there is 60 million barrels of crude recoverable from 373 million barrels in place.

This should prompt investors to re-appraise those net present value calculations.

The company’s own broker FinnCap reckons the risked net asset value of Barryroe is 39 pence a share (156 pence unrisked), which compares with a current share price for the entire group of 22 pence.

And this gets right to the nub of the Lansdowne story.  Unlike partner Providence, it hasn’t been out banging the drum with investors, so it has flown under the radar.

In fact investors haven’t had a great deal of time to familiarise themselves with the story as it stands today.

August last year marked a watershed for the firm. It renewed its licences on very favourable terms,  and brought on board FinnCap to broaden the shareholder base.

Before that the group, which was formed in 2005 to acquire the Irish exploration licences of Ramco, had been in a state of suspended animation, following the crash in the markets and oil price in later 2008.

The second milestone came in March when it converted around £2 million in debt, leaving it with just £250,000 of borrowings, and raised the cash required to fund that 3D programme.

The one thing it does not have, however is the £3-£5 million well costs for Barryroe, which means it will have to come back to investors at some point in the summer or farm down for a carried interest.

All Brown will say to this supposition is: “There are parties out there that we have talked to that want to get into Barryroe.”

The company has been the beneficiary of Providence’s public relations drive as boss Tony O’Reilly has done the rounds to raise his US$120 million contribution to that US$500 million drilling programme.

This can been seen in a sharp spike in the Lansdowne share price in February as investors began to get excited about the developments in the Celtic Sea.

However FinnCap reckons the market is still seriously under-estimating the potential of this hidden gem.

The broker has come up with an NAV of 102.4 pence a share, with Rosscarbery worth 32.7 pence and Amergin valued at 27.7 pence.

“Multiple high impact exploration and appraisal opportunities remain underrated by the market, providing an opportunity for early stage investors to get in at the start of a new exploration and appraisal story,” concludes FinnCap analyst Will Arnstein.